CHARTER COMMUNICATIONS, INC. Reference is made to "Part I. Item 1A. Risk Factors" and "Cautionary Statement Regarding Forward-Looking Statements," which describe important factors that could cause actual results to differ from expectations and non-historical information contained herein. In addition, the following discussion should be read in conjunction with the audited consolidated financial statements and accompanying notes thereto of Charter included in "Part II. Item 8. Financial Statements and Supplementary Data."
Overview
We are a leading broadband connectivity company and cable operator serving more than 32 million customers in 41 states through our Spectrum brand. Over an advanced high-capacity, two-way telecommunications network, we offer a full range of state-of-the-art residential and business services including Spectrum Internet, TV, Mobile and Voice. For small and medium-sized companies, Spectrum Business delivers the same suite of broadband products and services coupled with special features and applications to enhance productivity, while for larger businesses and government entities, Spectrum Enterprise provides highly customized, fiber-based solutions. Spectrum Reach delivers tailored advertising and production for the modern media landscape. We also distribute award-winning news coverage and sports programming to our customers through Spectrum Networks. See "Part I. Item 1. Business - Products and Services" for further description of these services, including customer statistics for different services. During the year endedDecember 31, 2022 , we added 1,728,000 mobile lines, 344,000 Internet customers and 126,000 residential and SMB customer relationships, which excludes mobile-only customers. We continue to see lower customer move rates and switching behavior among providers, which has reduced our selling opportunities. InOctober 2022 , we introduced Spectrum One, which brings together Spectrum Internet, Advanced WiFi and Unlimited Spectrum Mobile, to offer consumers fast, reliable and secure online connections on their favorite devices at home and on-the-go in a high-value package which contributed to our increase in mobile lines in the fourth quarter. In 2022, we also made targeted investments in employee wages and benefits inside of our operations to build employee skill sets and tenure as well as continued to invest in digitization of our customer service platforms and proactive maintenance all with the goal of improving the customer experience, reducing transactions and driving customer growth. We spent$1.8 billion on our rural construction initiative during the year endedDecember 31, 2022 . We expect that over time, our rural construction initiative will support customer growth and in 2022, we constructed over 200,000 rural passings. In addition, we continue to evolve and upgrade our network to provide higher Internet speeds and reliability and invest in our products and customer service platforms. We currently offer Spectrum Internet products with speeds up to 1 Gbps across our entire footprint and over the next three years, we plan to upgrade our network to provide multi-gigabit speeds. Our Advanced WiFi, a managed WiFi service that provides customers an optimized home network while providing greater control of their connected devices with enhanced security and privacy, is available to nearly all Internet customers. We continue to invest in our ability to provide a differentiated Internet connectivity experience for our mobile and fixed Internet customers with the availability of over 500,000 out of home WiFi access points across our footprint. In addition, we continue to work towards the construction of our own 5G mobile data-only network leveraging our CBRS PALs. By continually improving our product set and offering consumers the opportunity to save money by switching to our services, we believe we can continue to penetrate our expanding footprint and attract more spend on additional products for our existing customers. 29 -------------------------------------------------------------------------------- InJune 2022 , we entered into a joint venture with Comcast to develop and offer a next-generation streaming platform, Xumo, on a variety of streaming devices and smart TVs. Our investment is approximately$981 million with$271 million paid in 2022 and with the remaining non-cancelable required contributions to be paid over multiple years. We believe Spectrum-branded mobile services will drive higher sales of our core products, create longer customer lives and increase profitability and cash flow over time. During the years endedDecember 31, 2022 and 2021, our mobile product line increased revenues by$3.0 billion and$2.2 billion , respectively, reduced Adjusted EBITDA by approximately$343 million and$311 million , respectively, and reduced free cash flow by approximately$1.1 billion and$853 million , respectively. Mobile Adjusted EBITDA may continue to be negative primarily as a result of growth-related sales and marketing and other customer acquisition costs for mobile services, and depending on the pace of that growth. We also expect to continue to see negative free cash flow from the timing of device-related cash flows when we sell devices to customers pursuant to equipment installment plans and capital expenditures related to CBRS build-out.
We realized revenue, Adjusted EBITDA and income from operations during the periods presented as follows (in millions; all percentages are calculated using whole numbers; minor differences may exist due to rounding).
Years ended December 31,
2022 2021 Growth
Revenues $ 54,022 $ 51,682 4.5 %
Adjusted EBITDA $ 21,616 $ 20,630 4.8 %
Income from operations $ 11,962 $ 10,526 13.6 %
Adjusted EBITDA is defined as net income attributable to Charter shareholders
plus net income attributable to noncontrolling interest, net interest expense,
income taxes, depreciation and amortization, stock compensation expense, other
income (expenses), net and other operating (income) expenses, net, such as
special charges and (gain) loss on sale or retirement of assets. See "-Use of
Adjusted EBITDA and Free Cash Flow" for further information on Adjusted EBITDA
and free cash flow.
Growth in total revenue was primarily due to growth in our residential Internet,
mobile and commercial customers, price adjustments and higher advertising sales.
Adjusted EBITDA growth and changes in income from operations were impacted by
growth in revenue and increases in operating costs and expenses, primarily
mobile, costs to service customers and marketing.
Approximately 90% of our revenues for each of the years ended December 31, 2022
and 2021 are attributable to monthly subscription fees charged to customers for
our Internet, video, voice, mobile and commercial services as well as regional
sports and news channels. Generally, these customer subscriptions may be
discontinued by the customer at any time subject to a fee for certain commercial
customers. The remaining 10% of revenue is derived primarily from advertising
revenues, franchise and other regulatory fee revenues (which are collected by us
but then paid to local authorities), sales of mobile and video devices,
processing fees or reconnection fees charged to customers to commence or
reinstate service, installation, VOD and pay-per-view programming, and
commissions related to the sale of merchandise by home shopping services.
Critical Accounting Policies and Estimates
Certain of our accounting policies require our management to make difficult, subjective and/or complex judgments. Management has discussed these policies with the Audit Committee of Charter's board of directors, and the Audit Committee has reviewed the following disclosure. We consider the following policies to be the most critical in understanding the estimates, assumptions and judgments that are involved in preparing our financial statements, and the uncertainties that could affect our results of operations, financial condition and cash flows: •Capitalization of labor and overhead costs •Income taxes •Defined benefit pension plans
Capitalization of labor and overhead costs
Costs associated with network construction or upgrades, placement of the customer drop to the dwelling and the placement of outlets within a dwelling along with the costs associated with the deployment of new customer premise equipment necessary to provide Internet, video or voice services, are capitalized. Costs capitalized include materials, direct labor and certain indirect
30
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costs. These indirect costs consist of compensation and overhead costs
associated with support functions. While our capitalization is based on
specific activities, once capitalized, we track these costs on a composite basis
by fixed asset category at the cable system level, and not on a specific asset
basis. For assets that are sold or retired, we remove the estimated applicable
cost and accumulated depreciation. The costs of disconnecting service and
removing customer premise equipment from a dwelling and the costs to reconnect a
customer drop or to redeploy previously installed customer premise equipment are
charged to operating expense as incurred. Costs for repairs and maintenance are
charged to operating expense as incurred, while plant and equipment replacement,
including replacement of certain components, betterments, and replacement of
cable drops and outlets, are capitalized.
We make judgments regarding the installation and construction activities to be
capitalized. We capitalized direct labor and overhead of $1.8 billion and $1.7
billion for the years ended December 31, 2022 and 2021, respectively. We
capitalize direct labor and overhead using standards developed from actual costs
and applicable operational data. We calculate standards annually (or more
frequently if circumstances dictate) for items such as the labor rates, overhead
rates, and the actual amount of time required to perform a capitalizable
activity. For example, the standard amounts of time required to perform
capitalizable activities are based on studies of the time required to perform
such activities. Overhead rates are established based on an analysis of the
nature of costs incurred in support of capitalizable activities, and a
determination of the portion of costs that is directly attributable to
capitalizable activities. The impact of changes that resulted from these studies
were not material in the periods presented.
Labor costs directly associated with capital projects are capitalized. Capitalizable activities performed in connection with installations include such activities as:
•dispatching a "truck roll" to the customer's dwelling or business for service connection or placement of new equipment; •costs to package and ship new equipment to a customer's home for self-installation; •verification of serviceability to the customer's dwelling or business (i.e., determining whether the customer's dwelling is capable of receiving service by our cable network); •customer premise activities performed by in-house field technicians and third-party contractors in connection with the installation, replacement and betterment of equipment and materials to enable Internet, video or voice services; and •verifying the integrity of the customer's network connection by initiating test signals downstream from the headend to the customer premise equipment, as well as testing signal levels at the utility pole or pedestal. Judgment is required to determine the extent to which overhead costs incurred result from specific capital activities, and therefore should be capitalized. The primary costs that are included in the determination of the overhead rate are (i) employee benefits and payroll taxes associated with capitalized direct labor, (ii) direct variable costs associated with capitalizable activities, (iii) the cost of support personnel, such as care personnel and dispatchers, who assist with capitalizable installation activities, and (iv) indirect costs directly attributable to capitalizable activities. While we believe our existing capitalization policies are appropriate, a significant change in the nature or extent of our operating practices could affect management's judgment about the extent to which we should capitalize direct labor or overhead in the future. We monitor the appropriateness of our capitalization policies, and perform updates to our internal studies on an ongoing basis to determine whether facts or circumstances warrant a change to our capitalization policies. Income taxes Charter has federal tax net operating loss carryforwards that expire in 2035 resulting from the operations ofCharter Communications Holding Company, LLC and its subsidiaries and from loss carryforwards received as a result of the merger with TWC. In addition, Charter has state tax net operating loss carryforwards that generally expire in the years 2023 through 2042. Such tax loss carryforwards can accumulate and be used to offset Charter's future taxable income. Charter's federal tax loss carryforwards are subject to Section 382 and other restrictions. Charter also has indefinite life carryforwards as a result of Section 163(j) interest limitations. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. In evaluating the need for a valuation allowance, management takes into account various factors, including the expiration date (if any) of such carryforwards, the expected level of future taxable income, available tax planning strategies and reversals of existing taxable temporary differences. Approximately$11 million of valuation allowance associated with federal capital loss carryforwards and approximately$29 million of valuation allowance associated with state tax loss carryforwards and other miscellaneous deferred tax assets is 31 -------------------------------------------------------------------------------- recorded on theDecember 31, 2022 consolidated balance sheet. No valuation allowance is deemed necessary as ofDecember 31, 2022 related to the Section 163(j) interest limitation, based on the indefinite life carryforward, expected reversal of various deferred tax liabilities (primarily GAAP fixed asset depreciation), and a history of utilizing interest expense disallowance carryovers. We will continue to monitor this deferred tax asset and update the valuation allowance analysis as needed. In determining our tax provision for financial reporting purposes, we establish a reserve for uncertain tax positions unless such positions are determined to be "more likely than not" of being sustained upon examination, based on their technical merits. In evaluating whether a tax position has met the more-likely-than-not recognition threshold, we presume the position will be examined by the appropriate taxing authority that has full knowledge of all relevant information. A tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to be recognized in our financial statements. The tax position is measured as the largest amount of benefit that has a greater than 50% likelihood of being realized when the position is ultimately resolved. There is considerable judgment involved in determining whether positions taken on the tax return are "more likely than not" of being sustained. We adjust our uncertain tax reserve estimates periodically because of ongoing examinations by, and settlements with, the various taxing authorities, as well as changes in tax laws, regulations and interpretations. Charter is currently under examination by the Internal Revenue Service ("IRS") for income tax purposes for 2016 and 2019. Charter's 2020 and 2021 tax years remain open for examination and assessment. Charter's 2017 and 2018 tax years remain open solely for purposes of loss and credit carryforwards. Charter's short period return datedMay 17, 2016 (prior to the merger with TWC and acquisition of Bright House) and prior years remain open solely for purposes of examination of Charter's loss and credit carryforwards. TheIRS is currently examiningCharter Holdings' income tax returns for 2016, 2019 and 2021.Charter Holdings' 2020 tax year remains open for examination and assessment, while 2017 and 2018 remain open solely for purposes of credit carryforwards. TheIRS is currently examining TWC's income tax returns for 2011 through 2015. Prior to TWC's separation from Time Warner Inc. ("Time Warner") inMarch 2009 , TWC was included in the consolidatedU.S. federal and certain state income tax returns of Time Warner. TheIRS has examined Time Warner's 2008 through 2010 income tax returns and the appeal results are being evaluated. We do not anticipate that these examinations will have a material impact on our consolidated financial position or results of operations. In addition, we are also subject to ongoing examinations of our tax returns by state and local tax authorities for various periods. Activity related to these state and local examinations did not have a material impact on our consolidated financial position or results of operations during the year endedDecember 31, 2022 , nor do we anticipate a material impact in the future.
Defined benefit pension plans
We sponsor qualified and unqualified defined benefit pension plans that provide pension benefits to a majority of employees who were employed by TWC before the merger with TWC. As ofDecember 31, 2022 , the accumulated benefit obligation and fair value of plan assets was$2.2 billion and$2.6 billion , respectively, and the net funded asset was recorded as a$362 million noncurrent asset,$5 million current liability and$17 million long-term liability. As ofDecember 31, 2021 , the accumulated benefit obligation and fair value of plan assets was$3.4 billion and$3.5 billion , respectively, and the net funded asset was recorded as a$114 million noncurrent asset,$4 million current liability and$27 million long-term liability. Pension benefits are based on formulas that reflect the employees' years of service and compensation during their employment period. Actuarial gains or losses are changes in the amount of either the benefit obligation or the fair value of plan assets resulting from experience different from that assumed or from changes in assumptions. We have elected to follow a mark-to-market pension accounting policy for recording the actuarial gains or losses annually during the fourth quarter, or earlier if a remeasurement event occurs during an interim period. We use aDecember 31 measurement date for our pension plans. We recognized net periodic pension benefit of$254 million and$305 million in 2022 and 2021, respectively. Net periodic pension benefit or expense is determined using certain assumptions, including the expected long-term rate of return on plan assets, discount rate and mortality assumptions. We determined the discount rate used to compute pension expense based on the yield of a large population of high-quality corporate bonds with cash flows sufficient in timing and amount to settle projected future defined benefit payments. In developing the expected long-term rate of return on assets, we considered the current pension portfolio's composition, past average rate of earnings, and our asset allocation targets. We used a discount rate of 5.46% to determine theDecember 31, 2022 pension plan benefit obligation. A decrease in the discount rate of 25 basis points would result in an$83 million increase in our pension plan benefit obligation as ofDecember 31, 2022 and net periodic pension expense recognized in 2022 under our mark-to-market accounting policy. The expected long-term rate of return on plan assets used to determine net periodic pension benefit for the year endedDecember 31, 2023 is expected to be 5.00%. A decrease in the expected long-term rate of return of 25 basis points to 4.75%, while holding all other assumptions constant, would result in 32 -------------------------------------------------------------------------------- a decrease in our 2023 net periodic pension benefit of approximately$6 million . See Note 21 to the accompanying consolidated financial statements contained in "Part II. Item 8. Financial Statements and Supplementary Data" for additional discussion on these assumptions.
Results of Operations
A discussion of changes in our results of operations during the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 has been omitted from this Annual Report on Form 10-K, but may be found in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year endedDecember 31, 2021 , filed with theSEC onJanuary 28, 2022 , which is available free of charge on theSEC's website at www.sec.gov and on our investor relations website at ir.charter.com.
The following table sets forth the consolidated statements of operations for the periods presented (dollars in millions, except per share data):
Year Ended December 31,
2022 2021
Revenues $ 54,022 $ 51,682 Costs and Expenses: Operating costs and expenses (exclusive of items shown separately below)
32,876 31,482
Depreciation and amortization 8,903 9,345
Other operating expenses, net 281 329
42,060 41,156
Income from operations 11,962 10,526
Other Income (Expenses):
Interest expense, net (4,556) (4,037)
Other income (expenses), net 56 (101)
(4,500) (4,138)
Income before income taxes 7,462 6,388
Income tax expense (1,613) (1,068)
Consolidated net income 5,849 5,320
Less: Net income attributable to noncontrolling interests (794) (666)
Net income attributable to Charter shareholders $
5,055
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CHARTER SHAREHOLDERS: Basic$ 31.30 $ 25.34 Diluted$ 30.74 $ 24.47 Weighted average common shares outstanding, basic 161,501,355 183,669,369 Weighted average common shares outstanding, diluted 164,433,596 193,042,948 Revenues. Total revenues grew$2.3 billion or 4.5% during the year endedDecember 31, 2022 as compared to 2021 primarily due to increases in the number of residential Internet, mobile and commercial customers, price adjustments and higher advertising sales. 33
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Revenues by service offering were as follows (dollars in millions; all
percentages are calculated using whole numbers; minor differences may exist due
to rounding):
Years ended December 31,
2022 2021 Growth
Internet $ 22,222 $ 21,094 5.3 %
Video 17,460 17,630 (1.0) %
Voice 1,559 1,598 (2.5) %
Residential revenue 41,241 40,322 2.3 %
Small and medium business 4,301 4,170 3.1 %
Enterprise 2,677 2,573 4.0 %
Commercial revenue 6,978 6,743 3.5 %
Advertising sales 1,882 1,594 18.1 %
Mobile 3,042 2,178 39.7 %
Other 879 845 4.0 %
$ 54,022 $ 51,682 4.5 %
The increase in Internet revenues from our residential customers was attributable to the following (dollars in millions):
2022 compared to 2021
Increase related to rate and product mix changes $ 634
Increase in average residential Internet customers 494
$ 1,128
The increase related to rate and product mix was primarily due to promotional
roll-off and rate adjustments. Residential Internet customers grew by 275,000 in
2022 compared to 2021.
Video revenues consist primarily of revenues from basic and digital video services provided to our residential customers, as well as franchise fees, equipment service fees and video installation revenue. The decrease in video revenues was attributable to the following (dollars in millions):
2022 compared to 2021
Decrease in average residential video customers $ (621)
Increase related to rate and product mix changes
451
$ (170)
Residential video customers decreased by 719,000 in 2022 compared to 2021. The
increase related to rate and product mix was primarily due to price adjustments
and promotional roll-off and was partly offset by a higher mix of lower cost
video packages within our video customer base
The decrease in voice revenues from our residential customers was attributable to the following (dollars in millions):
2022 compared to 2021
Decrease in average residential voice customers $ (137)
Increase related to rate 98
$ (39)
Residential wireline voice customers decreased by 924,000 in 2022 compared to 2021.
34
--------------------------------------------------------------------------------The increase in SMB commercial revenues was attributable to the following (dollars in millions):
2022 compared to 2021
Increase in SMB customers $ 157
Decrease related to rate and product mix changes
(26)
$ 131
SMB customers increased by 64,000 in 2022 compared to 2021.
Enterprise revenues increased
Advertising sales revenues consist primarily of revenues from commercial advertising customers, programmers and other vendors, as well as local cable and advertising on regional sports and news channels. Advertising sales revenues increased$288 million during the year endedDecember 31, 2022 as compared to the corresponding period in 2021 primarily due to an increase in political revenue. During the years endedDecember 31, 2022 and 2021, mobile revenues included approximately$1.3 billion and$909 million of device revenues, respectively, and approximately$1.7 billion and$1.3 billion of service revenues, respectively. The increases in revenues are a result of an increase of 1,728,000 lines fromDecember 31, 2021 toDecember 31, 2022 . Other revenues consist of revenue from processing fees, regional sports and news channels (excluding intercompany charges or advertising sales on those channels), subsidy revenue, home shopping, video device sales, wire maintenance fees and other miscellaneous revenues. Other revenues increased approximately$34 million during the year endedDecember 31, 2022 as compared to the corresponding period in 2021 primarily due to subsidy revenue related to our rural construction initiative and an increase in processing fees offset by a decrease in sales of video devices.
Operating costs and expenses. The increase in our operating costs and expenses, exclusive of items shown separately in the consolidated statements of operations, was attributable to the following (dollars in millions):
2022 compared to 2021
Programming $ (224)
Regulatory, connectivity and produced content (191)
Costs to service customers 379
Marketing 268
Mobile 896
Other 266
$ 1,394
Programming costs were approximately $11.6 billion and $11.8 billion for the
years ended December 31, 2022 and 2021, representing 35% and 38% of total
operating costs and expenses, respectively. Programming costs consist primarily
of costs paid to programmers for basic, digital, premium, video on demand, and
pay-per-view programming. Programming costs decreased as a result of fewer
customers and a higher mix of lower cost video packages within our video
customer base offset by contractual rate adjustments, including renewals and
increases in amounts paid for retransmission consent.
Regulatory, connectivity and produced content decreased $191 million during the
year ended December 31, 2022 compared to the corresponding period in 2021
primarily due to lower costs of video devices sold to customers and regulatory
pass-through fees as well as lower sports rights costs as a result of more
basketball games during 2021 as compared to 2022 as the prior period had
additional games due to the delayed start of the 2020 - 2021 National Basketball
Association ("NBA") season as a result of COVID-19.
35
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Costs to service customers increased $379 million during the year ended
December 31, 2022 compared to the corresponding period in 2021 primarily due to
higher bad debt, adjustments to job structure, pay and benefits to build a more
skilled and longer tenured workforce and fuel costs.
Mobile costs of $3.4 billion and $2.5 billion for the years ended December 31,
2022 and 2021, respectively, were comprised of mobile device, mobile service,
customer acquisition and operating costs. The increase is attributable to an
increase in the number of mobile lines.
The increase in other expense was attributable to the following (dollars in
millions):
2022 compared to 2021
Advertising sales expense $ 84
Corporate costs 78
Enterprise 43
Stock compensation expense 40
Other 21
$ 266
Advertising sales expense increased during the year ended December 31, 2022
compared to the corresponding prior period due to higher costs of sales fees
driven by higher political revenue. Corporate costs increased primarily due to
higher computer and software expense and labor costs.
Depreciation and amortization. Depreciation and amortization expense decreased
by $442 million during the year ended December 31, 2022 compared to the
corresponding period in 2021 primarily due to certain assets acquired in
acquisitions becoming fully depreciated offset by an increase in depreciation as
a result of more recent capital expenditures.
Other operating expenses, net. The decrease in other operating expenses, net was attributable to the following (dollars in millions):
2022 compared to 2021
Special charges, net $ 24
(Gain) loss on sale of assets, net (72)
$ (48)
For more information, see Note 14 to the accompanying consolidated financial
statements contained in "Part II. Item 8. Financial Statements and Supplementary
Data."
Interest expense, net. Net interest expense increased by $519 million in 2022
from 2021 primarily due to an increase in weighted average debt outstanding of
approximately $8.3 billion as well as an increase in weighted average interest
rates. The increase in weighted average debt outstanding is primarily due to the
issuance of notes throughout 2021 and 2022.
36
--------------------------------------------------------------------------------Other income (expenses), net. The change in other income (expenses), net is attributable to the following (dollars in millions):
2022 compared to 2021
Loss on extinguishment of debt (see Note 8) $ 141
Loss on financial instruments, net (see Note 11) (9)
Net periodic pension benefit (cost) (see Note 21) (51)
Loss on equity investments, net (see Note 5)
76
$ 157
See Note 15 and the Notes referenced above to the accompanying consolidated financial statements contained in "Item 1. Financial Statements" for more information.
Income tax expense. We recognized income tax expense of$1.6 billion and$1.1 billion for the years endedDecember 31, 2022 and 2021, respectively. Income tax expense increased during the year endedDecember 31, 2022 compared to the corresponding period in 2021 primarily as a result of an increase in pretax income, lower benefit from state tax rate changes and decreased recognition of excess tax benefits resulting from share-based compensation during 2021. For more information, see Note 17 to the accompanying consolidated financial statements contained in "Part II. Item 8. Financial Statements and Supplementary Data." Net income attributable to noncontrolling interest. Net income attributable to noncontrolling interest for financial reporting purposes represents A/N's portion ofCharter Holdings' net income based on its effective common unit ownership interest and the preferred dividend of$70 million for the year endedDecember 31, 2021 . For more information, see Note 10 to the accompanying consolidated financial statements contained in "Part II. Item 8. Financial Statements and Supplementary Data."
Net income attributable to Charter shareholders. Net income attributable to
Charter shareholders was
Use of Adjusted EBITDA and Free Cash Flow
We use certain measures that are not defined byU.S. generally accepted accounting principles ("GAAP") to evaluate various aspects of our business. Adjusted EBITDA and free cash flow are non-GAAP financial measures and should be considered in addition to, not as a substitute for, net income attributable to Charter shareholders and net cash flows from operating activities reported in accordance with GAAP. These terms, as defined by us, may not be comparable to similarly titled measures used by other companies. Adjusted EBITDA and free cash flow are reconciled to net income attributable to Charter shareholders and net cash flows from operating activities, respectively, below. Adjusted EBITDA eliminates the significant non-cash depreciation and amortization expense that results from the capital-intensive nature of our businesses as well as other non-cash or special items, and is unaffected by our capital structure or investment activities. However, this measure is limited in that it does not reflect the periodic costs of certain capitalized tangible and intangible assets used in generating revenues and our cash cost of financing. These costs are evaluated through other financial measures.
Free cash flow is defined as net cash flows from operating activities, less capital expenditures and changes in accrued expenses related to capital expenditures.
Management and Charter's board of directors use Adjusted EBITDA and free cash flow to assess our performance and our ability to service our debt, fund operations and make additional investments with internally generated funds. In addition, Adjusted EBITDA generally correlates to the leverage ratio calculation under our credit facilities or outstanding notes to determine compliance with the covenants contained in the facilities and notes (all such documents have been previously filed with theSEC ). For the purpose of calculating compliance with leverage covenants, we use Adjusted EBITDA, as presented, excluding certain expenses paid by our operating subsidiaries to other Charter entities. Our debt covenants refer to these expenses as management fees, which fees were in the amount of$1.4 billion and$1.3 billion for the years endedDecember 31, 2022 and 2021, respectively. 37
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A reconciliation of Adjusted EBITDA and free cash flow to net income attributable to Charter shareholders and net cash flows from operating activities, respectively, is as follows (dollars in millions):
Years
ended
2022 2021
Net income attributable to Charter shareholders $ 5,055 $ 4,654
Plus: Net income attributable to noncontrolling interest 794 666
Interest expense, net 4,556 4,037
Income tax expense 1,613 1,068
Depreciation and amortization 8,903 9,345
Stock compensation expense 470 430
Other expenses, net 225 430
Adjusted EBITDA $ 21,616 $ 20,630
Net cash flows from operating activities $ 14,925 $ 16,239
Less: Purchases of property, plant and equipment (9,376) (7,635)
Change in accrued expenses related to capital expenditures 553 80
Free cash flow $ 6,102 $ 8,684 Liquidity and Capital Resources
Overview
We have significant amounts of debt. The principal amount of our debt as ofDecember 31, 2022 was$97.4 billion , consisting of$13.9 billion of credit facility debt,$56.8 billion of investment grade senior secured notes and$26.7 billion of high-yield senior unsecured notes. Our business requires significant cash to fund principal and interest payments on our debt. As ofDecember 31, 2022 ,$70.7 billion of our debt was rated investment grade and$26.7 billion was rated high yield debt. This split rating allows us to access both the investment grade debt market and the high yield debt market. Our projected cash needs and projected sources of liquidity depend upon, among other things, our actual results, and the timing and amount of our expenditures. As we continue to grow our market penetration of our mobile product, we will continue to experience negative working capital impacts from the timing of device-related cash flows when we sell devices to customers pursuant to equipment installment plans. Further, in 2022, Charter has become a meaningful federal cash tax payer as the majority of our net operating losses have been utilized. Free cash flow was$6.1 billion and$8.7 billion for the years endedDecember 31, 2022 and 2021, respectively. See table below for factors impacting free cash flow during the year endedDecember 31, 2022 compared to 2021. As ofDecember 31, 2022 , the amount available under our credit facilities was approximately$4.0 billion and cash on hand was approximately$645 million . We expect to utilize free cash flow, cash on hand and availability under our credit facilities as well as future refinancing transactions to further extend the maturities of our obligations. The timing and terms of any refinancing transactions will be subject to market conditions among other considerations. Additionally, we may, from time to time, and depending on market conditions and other factors, use cash on hand and the proceeds from securities offerings or other borrowings to retire our debt through open market purchases, privately negotiated purchases, tender offers or redemption provisions. We believe we have sufficient liquidity from cash on hand, free cash flow and Charter Operating's revolving credit facility as well as access to the capital markets to fund our projected cash needs. We continue to evaluate the deployment of our cash on hand and anticipated future free cash flow including to invest in our business growth and other strategic opportunities, including expanding the capacity of our network, the expansion of our network through our rural broadband construction initiative, the build-out and deployment of our CBRS spectrum, and mergers and acquisitions as well as stock repurchases and dividends. Charter's target leverage of net debt to the last twelve months Adjusted EBITDA remains at 4 to 4.5 times Adjusted EBITDA, and up to 3.5 times Adjusted EBITDA at the Charter Operating first lien level. Our leverage ratio was 4.47 times Adjusted EBITDA as ofDecember 31, 2022 . As Adjusted EBITDA grows, we expect to increase the total amount of our indebtedness to maintain leverage within Charter's target leverage range. Excluding purchases from Liberty Broadband discussed below, during the years endedDecember 31, 2022 and 2021, Charter purchased in the public market approximately 14.5 million and 15.9 million shares, respectively, of Charter Class A common stock for approximately$7.1 billion and$10.9 billion , respectively. Since the beginning of its buyback program inSeptember 2016 through the year endedDecember 31, 2022 , Charter has purchased in the public market approximately 149.4 million 38 --------------------------------------------------------------------------------
shares of Class A common stock and
InFebruary 2021 , Charter and Liberty Broadband entered into a letter agreement (the "LBB Letter Agreement"). The LBB Letter Agreement implements Liberty Broadband's obligations under the Stockholders Agreement to participate in share repurchases by Charter. Under the LBB Letter Agreement, Liberty Broadband will sell to Charter, generally on a monthly basis, a number of shares of Charter Class A common stock representing an amount sufficient for Liberty Broadband's ownership of Charter to be reduced such that it does not exceed the ownership cap then applicable to Liberty Broadband under the Stockholders Agreement at a purchase price per share equal to the volume weighted average price per share paid by Charter for shares repurchased during such immediately preceding calendar month other than (i) purchases from A/N, (ii) purchases in privately negotiated transactions or (iii) purchases for the withholding of shares of Charter Class A common stock pursuant to equity compensation programs of Charter. Charter purchased from Liberty Broadband 6.2 million and 6.1 million shares of Charter Class A common stock for approximately$3.0 billion and$4.2 billion during the years endedDecember 31, 2022 and 2021, respectively. InJanuary 2023 , Charter purchased from Liberty Broadband an additional 0.1 million shares of Charter Class A common stock for approximately$42 million . InDecember 2016 , Charter and A/N entered into a letter agreement, as amended inDecember 2017 (the "A/N Letter Agreement"), that requires A/N to sell to Charter or toCharter Holdings , on a monthly basis, a number of shares of Charter Class A common stock orCharter Holdings common units that represents a pro rata participation by A/N and its affiliates in any repurchases of shares of Charter Class A common stock from persons other than A/N effected by Charter during the immediately preceding calendar month, at a purchase price equal to the average price paid by Charter for the shares repurchased from persons other than A/N during such immediately preceding calendar month. A/N and Charter both have the right to terminate or suspend the pro rata repurchase arrangement on a prospective basis. During the years endedDecember 31, 2022 and 2021,Charter Holdings purchased from A/N 3.2 million and 3.3 millionCharter Holdings common units, respectively, for approximately$1.6 billion and$2.2 billion , respectively. As ofDecember 31, 2022 , Charter had remaining board authority to purchase an additional$414 million of Charter's Class A common stock and/orCharter Holdings common units, excluding purchases from Liberty Broadband. Although Charter expects to continue to buy back its common stock consistent with its leverage target range, Charter is not obligated to acquire any particular amount of common stock, and the timing of any purchases that may occur cannot be predicted and will largely depend on market conditions and other potential uses of capital. Purchases may include open market purchases, tender offers or negotiated transactions. As possible acquisitions, swaps or dispositions arise, we actively review them against our objectives including, among other considerations, improving the operational efficiency, geographic clustering of assets, product development or technology capabilities of our business and achieving appropriate return targets, and we may participate to the extent we believe these possibilities present attractive opportunities. However, there can be no assurance that we will actually complete any acquisitions, dispositions or system swaps, or that any such transactions will be material to our operations or results.
Free Cash Flow
Free cash flow decreased$2.6 billion during the year endedDecember 31, 2022 compared to the corresponding prior period due to the following (dollars in millions): 2022 compared to 2021 Increase in capital expenditures$ (1,741) Increase in cash paid for taxes, net
(1,168)
Increase in cash paid for interest, net
(460)
Increase in Adjusted EBITDA 986
Change in working capital, excluding change in accrued interest and taxes
188
Other, net (387)
$ (2,582)
Free cash flow was reduced by $1.1 billion and $853 million during the years
ended December 31, 2022 and 2021, respectively, due to mobile impacts negatively
affecting working capital, capital expenditures and Adjusted EBITDA. The
increase in capital expenditures is primarily due to the rural construction
initiative of $1.8 billion during the year ended December 31, 2022 . Cash
39
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paid for taxes, net increased as Charter has become a meaningful federal cash
tax payer in 2022. Other, net for the year ended December 31, 2022 includes the
payment of litigation settlements including the payment of a previously recorded
litigation settlement with Sprint Communications Company L.P. and T-Mobile USA,
Inc. See Note 14 to the accompanying consolidated financial statements contained
in "Part II. Item 8. Financial Statements and Supplementary Data."
Historical Operating, Investing, and Financing Activities
Cash and Cash Equivalents. We held
Operating Activities. Net cash provided by operating activities decreased$1.3 billion during the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 , primarily due to an increase in cash paid for taxes, higher cash paid for interest and the payment of litigation settlements offset by an increase in Adjusted EBITDA of$986 million . Investing Activities. Net cash used in investing activities for the years endedDecember 31, 2022 and 2021 was$9.1 billion and$7.8 billion , respectively. The increase in cash used was primarily due to an increase in capital expenditures, offset by changes in accrued expenses related to capital expenditures that increased by$473 million .
Financing Activities. Net cash used in financing activities decreased
Capital Expenditures
We have significant ongoing capital expenditure requirements. Capital expenditures were$9.4 billion and$7.6 billion for the years endedDecember 31, 2022 and 2021, respectively. The increase was primarily due to an increase in line extensions and customer premise equipment. The increase in line extensions was primarily due to the rural construction initiative. See the table below for more details. We currently expect full year 2023 capital expenditures, excluding line extensions, to be between$6.5 billion and$6.8 billion . We expect 2023 line extensions capital expenditures to approximate$4 billion . The actual amount of capital expenditures in 2023 will depend on a number of factors including, but not limited to, the pace of our network evolution and rural construction initiatives, supply chain timing and growth rates in our residential and commercial businesses.
Our capital expenditures are funded primarily from cash flows from operating
activities and borrowings on our credit facility. In addition, our accrued
liabilities related to capital expenditures increased
40
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The following tables present our major capital expenditures categories in
accordance with
Year ended December 31,
2022 2021
Customer premise equipment (a)$ 2,209 $ 1,967 Scalable infrastructure (b) 1,791 1,677 Line extensions (c) 2,990 1,642 Upgrade/rebuild (d) 845 706 Support capital (e) 1,541 1,643 Total capital expenditures$ 9,376 $ 7,635
Capital expenditures included in total related to:
Capital expenditures, excluding line extensions
$ 5,993 Line extensions (c) 2,990 1,642 Total capital expenditures$ 9,376 $ 7,635 Of which: Commercial services$ 1,511 $ 1,445 Of which: Mobile$ 376 $ 482 Of which: Rural construction initiative (f)$ 1,791
$ -
(a)Customer premise equipment includes costs incurred at the customer residence to secure new customers and revenue generating units, including customer installation costs and customer premise equipment (e.g., digital receivers and cable modems). (b)Scalable infrastructure includes costs not related to customer premise equipment, to secure growth of new customers and revenue generating units, or provide service enhancements (e.g., headend equipment). (c)Line extensions include network costs associated with entering new service areas (e.g., fiber/coaxial cable, amplifiers, electronic equipment, make-ready and design engineering). (d)Upgrade/rebuild includes costs to modify or replace existing fiber/coaxial cable networks, including betterments. (e)Support capital includes costs associated with the replacement or enhancement of non-network assets due to technological and physical obsolescence (e.g., non-network equipment, land, buildings and vehicles). (f)The rural construction initiative subcategory includes expenditures associated with our Rural Construction Initiative (for which separate reporting was initiated in 2022), excluding customer premise equipment and installation.
Debt
As of
December 31, 2022
Principal Accreted Value
Amount (a) Interest Payment Dates Maturity Date (b)
CCO Holdings, LLC :
4.000% senior notes due 2023 $ 500 $ 500 3/1 & 9/1 3/1/2023
5.500% senior notes due 2026 750 748 5/1 & 11/1 5/1/2026
5.125% senior notes due 2027 3,250 3,232 5/1 & 11/1 5/1/2027
5.000% senior notes due 2028 2,500 2,479 2/1 & 8/1 2/1/2028
5.375% senior notes due 2029 1,500 1,501 6/1 & 12/1 6/1/2029
6.375% senior notes due 2029 1,500 1,487 3/1 & 9/1 9/1/2029
4.750% senior notes due 2030 3,050 3,043 3/1 & 9/1 3/1/2030
4.500% senior notes due 2030 2,750 2,750 2/15 & 8/15 8/15/2030
4.250% senior notes due 2031 3,000 3,001 2/1 & 8/1 2/1/2031
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4.750% senior notes due 2032 1,200 1,189 2/1 & 8/1 2/1/2032 4.500% senior notes due 2032 2,900 2,924 5/1 & 11/1 5/1/2032 4.500% senior notes due 2033 1,750 1,730 6/1 & 12/1 6/1/2033 4.250% senior notes due 2034 2,000 1,983 1/15 & 7/15 1/15/2034Charter Communications Operating, LLC : Senior floating rate notes due 2024 900 901 2/1, 5/1, 8/1 & 11/1 2/1/2024 4.500% senior notes due 2024 1,100 1,098 2/1 & 8/1 2/1/2024 4.908% senior notes due 2025 4,500 4,486 1/23 & 7/23 7/23/2025 3.750% senior notes due 2028 1,000 992 2/15 & 8/15 2/15/2028 4.200% senior notes due 2028 1,250 1,244 3/15 & 9/15 3/15/2028 2.250% senior notes due 2029 1,250 1,241 1/15 & 7/15 1/15/2029 5.050% senior notes due 2029 1,250 1,243 3/30 & 9/30 3/30/2029 2.800% senior notes due 2031 1,600 1,586 4/1 & 10/1 4/1/2031 2.300% senior notes due 2032 1,000 993 2/1 & 8/1 2/1/2032 4.400% senior notes due 2033 1,000 990 4/1 & 10/1 4/1/2033 6.384% senior notes due 2035 2,000 1,985 4/23 & 10/23 10/23/2035 5.375% senior notes due 2038 800 787 4/1 & 10/1 4/1/2038 3.500% senior notes due 2041 1,500 1,483 6/1 & 12/1 6/1/2041 3.500% senior notes due 2042 1,350 1,332 3/1 & 9/1 3/1/2042 6.484% senior notes due 2045 3,500 3,469 4/23 & 10/23 10/23/2045 5.375% senior notes due 2047 2,500 2,506 5/1 & 11/1 5/1/2047 5.750% senior notes due 2048 2,450 2,393 4/1 & 10/1 4/1/2048 5.125% senior notes due 2049 1,250 1,240 1/1 & 7/1 7/1/2049 4.800% senior notes due 2050 2,800 2,797 3/1 & 9/1 3/1/2050 3.700% senior notes due 2051 2,050 2,031 4/1 & 10/1 4/1/2051 3.900% senior notes due 2052 2,400 2,323 6/1 & 12/1 6/1/2052 5.250% senior notes due 2053 1,500 1,479 4/1 & 10/1 4/1/2053 6.834% senior notes due 2055 500 495 4/23 & 10/23 10/23/2055 3.850% senior notes due 2061 1,850 1,810 4/1 & 10/1 4/1/2061 4.400% senior notes due 2061 1,400 1,389 6/1 & 12/1 12/1/2061 3.950% senior notes due 2062 1,400 1,379 6/30 & 12/30 6/30/2062 5.500% senior notes due 2063 1,000 986 4/1 & 10/1 4/1/2063 Credit facilities 13,877 13,823 VariesTime Warner Cable, LLC : 5.750% sterling senior notes due 2031 (c) 755 797 6/2 6/2/2031 6.550% senior debentures due 2037 1,500 1,655 5/1 & 11/1 5/1/2037 7.300% senior debentures due 2038 1,500 1,745 1/1 & 7/1 7/1/2038 6.750% senior debentures due 2039 1,500 1,693 6/15 & 12/15 6/15/2039 5.875% senior debentures due 2040 1,200 1,250 5/15 & 11/15 11/15/2040 5.500% senior debentures due 2041 1,250 1,257 3/1 & 9/1 9/1/2041 5.250% sterling senior notes due 2042 (d) 786 760 7/15 7/15/2042 4.500% senior debentures due 2042 1,250 1,150 3/15 & 9/15 9/15/2042Time Warner Cable Enterprises LLC : 8.375% senior debentures due 2023 1,000 1,010 3/15 & 9/15 3/15/2023 8.375% senior debentures due 2033 1,000 1,238 7/15 & 1/15 7/15/2033$ 97,368 $ 97,603 (a)The accreted values presented in the table above represent the principal amount of the debt adjusted for original issue discount or premium at the time of sale, deferred financing costs, and, in regards to debt assumed in acquisitions, fair value premium adjustments as a result of applying acquisition accounting plus the accretion of those amounts to the balance sheet date. However, the amount that is currently payable if the debt becomes immediately due is equal to the principal amount of the debt. In regards to the Sterling Notes, the principal amount of the debt and any premium or discount is remeasured into US dollars as of each balance sheet date. We have availability under our credit facilities of approximately$4.0 billion as ofDecember 31, 2022 . 42 -------------------------------------------------------------------------------- (b)In general, the obligors have the right to redeem all of the notes set forth in the above table in whole or in part at their option, beginning at various times prior to their stated maturity dates, subject to certain conditions, upon the payment of the outstanding principal amount (plus a specified redemption premium) and all accrued and unpaid interest. (c)Principal amount includes £625 million valued at$755 million as ofDecember 31, 2022 using the exchange rate as ofDecember 31, 2022 . (d)Principal amount includes £650 million valued at$786 million as ofDecember 31, 2022 using the exchange rate as ofDecember 31, 2022 . In 2022, Charter Operating entered into an amendment to its credit agreement. Also in 2022,CCO Holdings andCCO Holdings Capital Corp. jointly issued$2.7 billion aggregate principal amount of senior unsecured notes andCharter Operating and Charter Communications Operating Capital Corp. jointly issued$3.5 billion aggregate principal amount of senior secured notes. The notes were issued at varying rates, prices and maturity dates and the net proceeds were used to pay related fees and expenses and for general corporate purposes, including funding buybacks of Charter Class A common stock andCharter Holdings common units as well as repaying certain indebtedness. See Note 8 to the accompanying consolidated financial statements contained in "Part II. Item 8. Financial Statements and Supplementary Data" for further details regarding our outstanding debt and other financing arrangements, including certain information about maturities, covenants and restrictions related to such debt and financing arrangements. The agreements and instruments governing our debt and financing arrangements are complicated and you should consult such agreements and instruments which are filed with theSEC for more detailed information. AtDecember 31, 2022 , Charter Operating had a consolidated leverage ratio of approximately 3.0 to 1.0 and a consolidated first lien leverage ratio of 3.0 to 1.0. Both ratios are in compliance with the ratios required by the Charter Operating credit facilities of 5.0 to 1.0 consolidated leverage ratio and 4.0 to 1.0 consolidated first lien leverage ratio. A failure by Charter Operating to maintain the financial covenants would result in an event of default under the Charter Operating credit facilities and the debt ofCCO Holdings . See "Part I. Item 1A. Risk Factors - The agreements and instruments governing our debt contain restrictions and limitations that could significantly affect our ability to operate our business, as well as significantly affect our liquidity."
Recently Issued Accounting Standards
See Note 22 to the accompanying consolidated financial statements contained in "Part II. Item 8. Financial Statements and Supplementary Data" for a discussion of recently issued accounting standards.
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